HTFs + CAD = Loonie?

November 1, 2015 01:00 PM

“Say not, ‘I have found the truth,’ but rather, ‘I have found a truth.’”

—Kahlil Gibran

One of the conclusions reached last month (see “Changing euro day structures over time,” September 2015) was that the rise of high-frequency and algorithmic trading coincided with a decrease in wide-ranging trend days and an increase in symmetric normal days. The idea that computer-driven trading can and apparently does focus more on capturing minor fluctuations and statistical noise over longer-term economic signals does not inhibit markets from performing functions such as price discovery or risk management.

The euro was used as an example because it’s the most active of all of the major currencies, and unlike the Japanese yen or Swiss franc, the euro has had fewer bouts of outright manipulation or imposed cross-rate ceilings. This is damning with faint praise.

Does the Canadian dollar—a major currency whose active trade can be tracked on a daily basis since July 1977 using the CRB-Infotech CD-ROM—confirm the conclusion that was drawn for the euro? The answer, to end the suspense right here and now, is “No.”

The relative frequency of trending intraday structures has been increasing for the Canadian dollar since 1985 in direct contravention of the pattern noted for the euro. However, the relative frequency of normal trading days for the Canadian dollar has been rising since 2002. Restated, the intraday trading structures for the Canadian dollar are something of an either-or proposition where four of the eight intraday structures described herein account for 87.2% of the observations.

Day structure classification

To refresh from last month, we can normalize a trading day’s structure by taking key points such as its open, high, low, close and midpoint (O, H, L, C and M) and locating them on a stochastic distribution of the day’s range. We can create eight different day structures by classifying each day along the relationship of its open to its close, then along the relationship of its open to its midpoint and finally along the relationship of its midpoint to its close (see “Day structure breakdown,” below).

These intraday structures can and indeed should be placed in context with each day’s relationship to the previous day. After all, a market closing on its low and below the previous day’s low after making a higher high—a classic reversal-type of day—denotes something very different from a market closing on its low after opening above the previous day’s midpoint, a classic downtrend-continuation formation.

Just as the intraday structures can be classified on a mutually exclusive and collectively exhaustive basis, we can compare each day’s open, high, low, close and midpoint to those of the previous day on another unique scale:

1: Greater than the previous high
4: Less than the previous low
2: Greater than or equal to the midpoint
3: All else

These two schemes can be combined to give each day a unique six-character tag where the first digit is one of the eight intraday codes and the next five digits are one of the four comparison codes vis-à-vis the previous day for the O/H/M/L/C points, respectively.

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About the Author

Howard L. Simons is president of Rosewood Trading. @simonsresearch